BREAKING THE BACK OF INFLATION

June 14, 2004

It is said that Paul Volcker, chairman of the Federal Reserve Board, deserves all the credit for eliminating inflation under the Reagan administration. But Reagan was no passive observer, says Bruce Bartlett.

It is not now remembered how much pressure there was on Reagan to get rid of Volcker and have the Fed run a more accommodative monetary policy. Yet he not only supported Volcker publicly, he appointed like-minded people to the Fed whenever he had the chance. He reappointed Volcker to the chairmanship in 1983 and appointed Alan Greenspan to replace him in 1987.

The result of the Fed's tight money policy was a far faster reduction in inflation than most economists thought feasible.

From 12.5 percent in 1980, it fell to 8.9 percent in 1981, and 3.8 percent in 1982. It is hard to explain just how remarkable this achievement was.

Most economists would have considered it impossible in 1980, especially given the big 1981 tax cut, which was generally viewed as pouring gasoline on the fires of inflation by economists schooled in Keynesian economics, explains Bartlett.

Breaking the back of inflation was an enormous accomplishment. Reagan deserves much of the credit. Larger budget deficits were an unavoidable consequence.

Source: Bruce Bartlett, "Breaking the Back of Inflation," National Center for Policy Analysis, June 14, 2004.